“Who is the predator and who is the prey? That is what we wonder today.”

“Is China preying on BHP Billiton (ASX: BHP)? Or is BHP preying on Rio? Who are the barracudas and who are the minnows?” asks Dan Denning of the Daily Reckoning Australia.

Steel prices are up by about 10% this year already.

First, the big fish. “With iron ore prices rising explosively,” says China’s National Development Reform Commission (NDRC), “many domestic firms are very enthusiastic about investing in overseas mines, which needs strengthened macro guidance from the country.”

Macro guidance is about what you’d expect from a nation that has methodically and with stunning success, pulled itself from centrally planned poverty to centrally planned prosperity (at least for some). But what does ‘macro guidance’ mean? GPS? RFID?

–Today’s Australian has all the intriguing details on China’s Grand Strategy towards Australia in a story titled, “Beijing takes over BHP raid plans.” The comments from the NDRC are a fascinating take on how at least some Chinese officials think capitalism works. “Globally, iron ore mines that are of high quality and easy to exploit are basically in the hands of major multinational companies. Our firms need to pay a high cost to mine iron ore resources abroad. Their exploitation risks and costs are increasing.”

–Is it really ‘exploitation’ to pay the market price for natural resources? Or is that just the language of socialism? Perhaps a crash course on free market economics is in order for the NDRC.

–Not to sound too condescending (this coming from someone who uses the royal We), but you have to wonder if there is some wishful thinking going on in Beijing. Or maybe, after having lost money in Blackstone and Bear Stearns, state backed firms are wary of buying equity chunks in public companies. Maybe they want a different arrangement.

–Either way, it is clear the Chinese have woken up to the fact that the century is theirs for the taking. But there seems to be some confusion about what rules the century is going to operate under: will it be mostly free market rules…or other rules. The market price for the resources China wants is rising. So it would prefer to not pay the market price.

–By the way, we reckon free markets are headed for a bit of a bear market. Globalisation, in the bastard form we find it (where trade isn’t really free and currencies are manipulated regularly) has produced US$114 oil, massive inflation, the worst credit crisis since 1929, food riots, and a growing popular backlash. Expect more direct government intervention and regulation in financial markets and, perhaps, resource markets. That should play right into China’s hands, actually.

–This latest line of probing rhetoric coming from China is not exactly a new line of attack. After all, the resources are there for the taking on the public markets. There’s no need to attack at all. But it does feel like an attempt to flush out Australia’s politicians and get them more involved in China’s plans for Australian resources. The government is already involved, of course, with the Takeovers panel quashing the bid by Shougang Steel and APAC resources to take a 40% stake in iron ore up-and-comer Mt. Gibson (ASX:MGX).

–Let’s put this whole affair in the context of steel and GDP. We found the chart below yesterday while preparing for a radio interview with a Canadian business show. The host wanted to know how steel companies could afford to pay a 300% increase in coking coal prices and a 75% increase in iron ore prices. We asked him to picture the chart below.

Steel and GDP, Marching Hand in Hand

Source: Mining and commodities exports, Angelia Grant,
John Hawkins and Lachlan Shaw, 2006

–The chart shows that world steel production leapt ahead of GDP growth during the two big periods of Asian industrialisation of the last 50 years, in Japan and Korea. With China now industrialising, and coming off a much lower base in steel production, a period of growth in steel production that exceeded world GDP would be quite the spectacle. It would also mean China’s consumption of base metals is just now hitting high gear.

–From an Australian perspective, what’s so flabbergasting about the chart is that both Korea and Japan have been devoted customers of the black coal from the Bowen Basin that is so well suited for coking. They’ve also been tied up for years as customers of Rio Tinto and BHP for the iron ore that comes from the Pilbara. Now you add China to the queue.

–Despite its surge to the top in terms of global steel production, China’s individual steel firms are still smaller, at least according to the latest figures from the International Iron and Steel Institute, than Japan and Korea. Nippon Steel, Posco, and JFE are all bigger producers than Baosteel. Keep in mind, however, that as recently as 2002, China was a net steel importer. It’s now a net exporter.

Source: International Iron and Steel Institute

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